Dividend Growth Case Study: How McDonald’s Corporation (MCD) Generated a 15.6% CAGR Over 2.1 Years

3-Step Process To Find More Great Businesses Trading at Attractive Prices

The 8 Rules of Dividend Investing identify and rank high quality businesses using quantitative metrics. This removes (or at least greatly reduces) bias from the stock identification and selection process.

They find high quality businesses trading at fair or better prices suitable for long-term holding – like McDonald’s in 2014.

You don’t have to use the same rules and screen I do to find great businesses trading at fair or better prices.

The 3 step process below is a good start:

Step 1

Find Dividend Aristocrats with:

1. Price-to-earnings ratios below that of the S&P 500

2. Dividend yields higher than the S&P 500’s

You can use the downloadable Dividend Aristocrats spreadsheet at this link to quickly accomplish step 1.

The S&P 500’s current metrics are:

– Price-to-earnings ratio of 24

– Dividend yield of 2.1%

Step 2

Become familiar with the stocks that match these screens. Identify their competitive advantage. Reason whether or not the company will still have a competitive advantage 10 or 20 years from now.

Step 3

Prepare yourself to hold through turbulence before investing. Make sure you define why you will sell. I believe the time to sell a dividend growth stock is when it stops becoming a dividend growth stock – when it cuts or eliminates its dividend. This is a clear sign the business has lost (or is afraid of losing) its competitive advantage.

Investing in great businesses trading at fair or better prices does not and will not produce overnight riches. It is not a get rich quick scheme.

Staying the course and following a reasonable dividend growth plan will very likely produce favorable returns over long periods of time.

Disclosure: None